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 Remarks of Under Secretary for Terrorism and Financial Intelligence David Cohen at the American Bankers Association\American Bar Association Money Laundering Enforcement Conference


11/12/2012


 As prepared for delivery


WASHINGTON - Good afternoon.  It is a great pleasure to be here with you today at the 24th annual ABA/ABA Money Laundering Enforcement Conference.

First, as this Conference is taking place over the Veteran’s Day holiday weekend, I’d like to take a moment to recognize those brave women and men who have fought in our Armed Forces to protect our country.  To all of our veterans – and I am sure we have some with us in this room today – and to the families who support them, thank you.

As Rick mentioned, I spoke at this Conference in October 2009, during my first year in Treasury’s Office of Terrorism and Financial Intelligence. 

I have now been with the Treasury Department for almost four years.  And thanks to the President’s re-election last week, I am thrilled to have the opportunity to continue to lead what I believe is one of most interesting, innovative and important offices in the U.S. Government. 

No matter your political orientation, no matter who you voted for last week, I think we all can agree that it is essential to protect our financial system from abuse, to deprive those who seek to do us harm of critical funding streams, and to use financial pressure to advance our most pressing national security and foreign policy interests. 

That is the mission of my office.  And as the folks here know better than most, the private sector is an absolutely crucial partner in all aspects of that mission. 

So let me begin by recognizing all that you do – in partnership with us – to pursue this vitally important mission. 

Status Report

Three years ago, I spoke to this Conference about my office’s work to address some of our toughest illicit financing threats – fundraising by al Qa’ida and the Taliban, the growing criminal-terrorist nexus, Iran’s use of the international financial system. 

The principal focus of my remarks today will be the work that we are doing – and will be doing in the coming months and years – to strengthen our domestic anti-money laundering framework.  

But before I turn to that topic, I thought I would give you a brief status report on some of the issues I discussed when I was here in 2009, and some of the other issues that we have been focused on over these past three years.

            Al Qa’ida Core

When I last spoke to you, I offered an overview of the state of al Qa’ida’s finances, and particularly the financial position of al Qa’ida’s central organization – al Qa’ida’s “core.”  At the time, we assessed that al Qa’ida core was in its weakest financial condition in years, and that its influence was waning. 

There have been a number of significant developments since then that have affected al Qa’ida’s financial situation, including the death of Usama bin Laden.  Somewhat less notably, several of his key financial lieutenants, including Saeed al-Masri, Atiyah Abd al-Rahman, and Abu Yahya al-Libi also are no longer with us. 

Their deaths, along with continued international efforts to combat terrorist financing, have degraded the ability of al Qa’ida’s core to move and manage funds.

Kidnapping for Ransom

Despite progress in disrupting al Qa’ida’s traditional methods of terrorist financing, we continue to face another challenge I discussed in 2009:  the increasing nexus between terrorist financing and criminal activity, in particular, kidnapping for ransom by al Qa’ida’s affiliates in the Sahel region of Africa and in Yemen. 

This is the most significant terrorist financing threat we face today.  We estimate that terrorist organizations have collected approximately $120 million in ransom payments over the past eight years, much of that by al Qa’ida in the Islamic Maghreb – better known by its initials, AQIM.

To combat this growing threat, we are working closely with our international counterparts to set up three lines of defense against kidnapping for ransom. 

The first is prevention.  There is a global effort under way to develop best practices for governments and industries to reduce the risk that their citizens and employees will be kidnapped in the first place.  

Part of this effort involves working with the insurance sector to make use of risk management techniques, and the financial incentives that only the insurance industry can create, to reduce the likelihood that terrorists will be able to take hostages.

When prevention fails, our second line of defense is to limit the benefit that hostage-takers can hope to receive by encouraging governments and others to refuse to make concessions, including the payment of ransoms.

For many years, it has been the policy of the United States to refuse to pay ransoms or make any other concessions to hostage takers.  We have adopted and adhered to this policy because it is the surest means to protect the lives of our citizens – both by clearly signaling to potential hostage-takers that they will not be rewarded for their crimes, and by depriving terrorist groups of the funding necessary to plan and conduct future attacks against our citizens.  Some other countries, including the United Kingdom, have embraced the same approach, but we still have work to do with others, particularly in Europe. 

When ransoms are paid, our third line of defense is denial of benefits.  That means working with governments and the private sector to locate, arrest, and prosecute hostage takers, and, where possible, to locate, freeze and forfeit the proceeds of their crimes.

Combating kidnapping for ransom presents some very difficult moral and practical challenges, but we are committed to building the international consensus and capacity to deprive terrorists of this important revenue stream.  In this effort, we need your help – and the help of your international counterparts – as we seek to deprive terrorists of the benefits of kidnapping for ransom.

            Afghanistan and Pakistan

In addition to our efforts on kidnapping for ransom, we are continuing to combat terrorist financing in a key region I discussed with you in 2009 – Afghanistan and Pakistan.  Our efforts are increasingly focused on the financial channels, such as hawalas and exchange houses, that are used by illicit actors to support the Taliban, the Haqqani Network and other insurgent and terrorist groups in South Asia. 

Let me give you one example.  Earlier this year, we acted against two exchange houses, the Haji Kaihrullah Haji Sattar Money Exchange and the Roshan Money Exchange, which principally operate in Afghanistan and Pakistan, for storing and moving money for the Taliban.  Reports from the field indicate that the action significantly disrupted the ability of these entities to facilitate financial transactions for the Taliban.

            Transnational Organized Crime

In my remarks last time, I also described the threat we face from transnational organized crime. Since then, we have taken significant strides in our efforts to protect the financial system from organized criminal enterprises. 

Most importantly, in July of last year, the President announced the National Strategy to Combat Transnational Organized Crime.  A key component of the President’s Strategy is a new Executive Order that established a sanctions program, which we at Treasury are implementing, designed specifically to disrupt the financial networks supporting transnational criminal organizations. 

When the President signed the Executive Order, he named four transnational criminal organizations – the Brother’s Circle, the Camorra, the Zetas and the Yakuza – and over the past year we have imposed sanctions on about two dozen senior leaders of these organizations. 

Last month, we added one new group, the MS-13 gang, to the list of transnational criminal organizations.  Now that MS-13 is designated, we are working to apply sanctions to its senior leaders and key facilitators, as we continue to highlight and designate for sanctions the key leaders and support networks of the original four transnational organized criminal groups.

            Section 311 Actions Against Primary Money Laundering Concerns

Since I was here last, we have also employed one of our most powerful tools – Section 311 of the PATRIOT Act – to identify primary money laundering concerns and take action to protect our financial system. 

In February 2011, we took action under Section 311 against Beirut-based Lebanese Canadian Bank, when we issued a finding identifying it as a critical node in a vast trade-based narcotics money laundering network – a network from which the terrorist group Hezbollah derived financial support.  Since then, the bulk of the bank’s assets – excluding those accounts that were suspect – were sold to another financial institution, and the Lebanese Canadian Bank shut its doors.      

More recently, in May of this year, we issued a Section 311 finding with respect to a Belarussian Bank, Credex, to expose highly suspicious transaction patterns through nested accounts that allowed Credex to access the U.S. financial system.  We used Section 311 because the pervasive lack of transparency surrounding Credex made it virtually impossible to discern whether the bank was engaged in any legitimate business at all.  

            Iran

And last November, we employed Section 311 against Iran, identifying the entire Iranian financial sector as posing an illicit finance risk. 

The Iran 311 action is just one element of increasing financial pressure we have applied on Iran over the past three years as part of a dual-track strategy that combines an offer of engagement to the Iranian government with the certainty of intensifying sanctions so long as Iran refuses to engage meaningfully on its nuclear program. 

I could fill the rest of your afternoon with a discussion of our comprehensive, multi-dimensional and multi-lateral sanctions strategy with respect to Iran, but suffice it to say, the range, depth, and power of the financial and economic sanctions that Iran faces today are unlike anything any country has ever encountered. 

To give you just a flavor, since we were last together, we have aggressively implemented the Comprehensive Iran Sanctions, Accountability, and Divestment Act of 2010, known as “CISADA,” which requires foreign financial institutions to choose between working with designated Iranian banks or working with U.S. banks. 

Our implementation of CISADA has led to a dramatic decrease in the access that sanctioned Iranian banks have to the international financial system.  As I am sure you know, our CISADA implementation also has included applying sanctions against two banks, Bank of Kunlun in China, and Elaf Islamic Bank in Iraq, for providing financial services to designated Iranian banks.

We also have taken direct aim at the Central Bank of Iran, which was complicit in the illicit activity of Iran’s designated banks and was critical to Iran’s receipt of oil revenue.

And we have gone directly after Iran’s most significant source of revenue – its oil sales, including by applying sanctions against the National Iranian Oil Company (NIOC) and its oil-trading arm, the NaftIran Intertrade Company (NICO). 

And we have done all this in conjunction with, and in collaboration with, an unprecedented coalition of international partners that have also taken a series of critically important steps to impose increasing financial and economic pressure on Iran.

This effort, combined with the Iranian government’s own gross mismanagement of its economy, is having a major impact. 

The vast majority Iran’s banks, including its key state-owned institutions, have been cut off from the international financial system.  Iran’s petroleum exports – by far the most important source of Iran’s foreign exchange earnings – have declined approximately 55% this year.  And since this time last year, the rial, Iran’s currency, has lost more than half of its value.

While we believe that there remains time and space for a diplomatic solution if Iran’s leadership takes the strategic decision to make meaningful concessions, you can be sure that we have no intention of relenting on the pressure track so long as Iran refuses to address in a meaningful and productive way the very serious concerns with its nuclear program. 

 

        FinCEN

And one final item on my status report.

As you know, we have a new Director of FinCEN, Jennifer Shasky Calvery.  Director Calvery will be speaking to you tomorrow morning, and she will describe her plans for FinCEN and her vision on where to take FinCEN – plans and a vision that I share completely. 

I don’t want to steal her thunder, so I will just say this: I could not be more excited that Jennifer Calvery agreed to serve as FinCEN Director. 

She is passionate about fighting money laundering, she has a wealth of experience from her time in the Justice Department, and she is a proven leader. 

And equally importantly, Director Calvery is committed to FinCEN working closely with FinCEN’s counterparts within the government as well as in the regulated community.  I am confident that you will find her to be a tremendous partner in our collaborative efforts to combat money laundering and other forms of illicit finance in the months and years ahead.

Key Anti-Money Laundering Initiatives

So that is some of what we’ve be up to over the past several years. 

Many of these issues, of course, will continue to occupy our time and attention in the months and years ahead – as they should.  And, undoubtedly, some new issues will arise that will demand our attention.

But there is one area where we have long been engaged that I know will be the focus of even more attention in the coming year – and that is our domestic anti-money laundering regulatory, compliance and enforcement framework, the bread-and-butter of what you do.

Let me explain why.

We all have an interest in a regulatory framework that protects our financial system from money laundering while, at the same time, facilitating effective – and cost-effective – compliance. 

We all want our financial institutions to be able to comply with well-designed and sensibly implemented regulatory requirements without incurring undue burden.  

And we all have been driving at this goal.  Congress has provided a strong legislative foundation for anti-money laundering efforts.  The regulators have promulgated a range of rules designed to combat money laundering and terrorist financing.  And the banks and other financial institutions have devoted substantial human and capital resources to compliance. 

And yet we continue to see reports that massive amounts of illicit proceeds are laundered through U.S. financial institutions.  We continue to hear from you that there is a disconnect between what is needed to effectively combat money laundering and what you are being asked to do.  And we continue to see enforcement actions for deficiencies with respect to some of the most basic AML obligations. 

This all highlights the importance of ensuring that the domestic AML regulatory framework is appropriately designed, and that compliance efforts are appropriately tuned to meet the real challenges that we face in combating money laundering and other forms of illicit finance.

To this end, my office, in cooperation with other government agencies, is undertaking a number of efforts to strengthen and clarify our AML framework.

Let me describe two of these initiatives – the customer due diligence rulemaking process and a new interagency AML task force.

            Customer Due Diligence Rulemaking

As many of you are aware, FinCEN issued an advance notice of public rulemaking – an ANPRM – earlier this year seeking comment on an explicit customer due diligence obligation for financial institutions. 

The ANPRM has two main components. 

First, it seeks to codify existing expectations regarding customer identification, understanding the purpose of the customer relationship, and account monitoring. 

As regulations have been added to implement new legislation and address new issues, interrelated regulatory obligations have been layered one on top of the other.  What’s more, some important AML regulatory expectations are implied rather than explicitly imposed. 

So one objective of the proposed rule is to set out customer due diligence obligations in one, coherent regulation.

Second, the draft rule proposes to extend customer due diligence obligations to include a new requirement to collect information on an account’s beneficial owner.

Our focus on beneficial ownership is the result of years of engagement with the financial services industry, law enforcement, international counterparts, NGOs, government agencies and Congressional committees – you name it – that all have emphasized one overarching point: Real financial transparency – that is, accurate information about who benefits from activity in an account – is essential to identifying elevated risks and stopping illicit activity and illicit actors. 

Beneficial ownership information is invaluable to financial institutions seeking to understand their risk exposure and to ensure that illicit actors do not abuse their institutions.  And it is tremendously useful to regulators, law enforcement agencies and national security authorities seeking to deter, detect, and punish criminal conduct and protect our safety.

Nonetheless, as you know, financial institutions typically are required to verify only basic information about their legal entity accountholders, and not to understand the true beneficial owner of the accountholder.    

Although existing rules require financial institutions to obtain beneficial ownership information in limited circumstances, we know that, in practice, many financial institutions often obtain this information even when it is not strictly required, according to policies and procedures they develop internally over time. 

But those policies and procedures vary from institution to institution.  This is yet another reason it’s important to clarify and align requirements to obtain beneficial ownership information.  Everyone – industry and government alike – would benefit from a level playing field.

Now, we recognize that a new customer due diligence rule, especially one that contains an obligation to obtain beneficial ownership information, would be quite consequential.  So we are undertaking this rulemaking a little differently.

Unlike most of the AML rules, which proceed through the typical NPRM process, we began with an Advance Notice of Rulemaking.

Along with possible regulatory language, the ANPRM asks a number of foundational questions about the existing customer due diligence process and the importance and difficulty of obtaining accurate beneficial ownership information as part of that endeavor.

Then, at the request of industry, we extended the comment period to allow for additional comments. 

And to gather even more information, we have organized a series of public outreach events around the country to hear from law enforcement, the regulated industry and interested citizens about the proposed rule.  This began with a hearing last July in Treasury’s Cash Room, at which we heard testimony from a broad range of industry representatives, law enforcement, and Congressional staff.  Outreach continued with public roundtables in Chicago, New York, and Los Angeles, with one more to be held in Miami next month.

We are taking this approach to ensure that any rule that emerges, assuming one does, is both sensitive to regulatory burden and improves the effectiveness of our overall AML effort.  We are also taking this approach because we understand that different types of financial institutions, as well as different product lines, may present different customer identification risks and opportunities.  So while we will seek to promote consistency in regulatory requirements across sectors, we also recognize that a bespoke approach may be best.

            AML Task Force

In addition to looking at the customer due diligence rule, we believe there may be more that we can do – at an even more fundamental level – to strengthen and clarify our anti-money laundering framework.

To figure this out, my office has set up a task force with the federal functional regulators and the enforcement agencies to, in essence, look under the hood and take stock of which components of our AML regime are working well, which are not, how the different parts are working together, and to assess how the entire enterprise is operating. 

This is a major undertaking, but it has been more than 40 years since the Bank Secrecy Act was enacted. 

And while the BSA has been amended several times – most notably with the enactment of the USA PATRIOT Act in 2001 – it has been a long time since the federal policymaking, compliance and enforcement community stepped back and took a hard and comprehensive look at the AML statutory, regulatory, compliance and enforcement structure. 

In addition, as much as the legal and regulatory landscape has changed in the last 40 years, there have been even more remarkable changes in the financial industry itself. 

Changes driven by technological innovation, financial innovation, and a desire to include broader segments of the population in the formal financial sector mean that banks and other financial institutions are providing financial services to increasingly distant customers, and are offering their customers a much broader range of products.

But it’s not just the products and services that are getting more sophisticated.  Money laundering schemes themselves are also becoming increasingly sophisticated and international in nature.  The same hugely beneficial technological and financial advancements have had the unfortunate side effect of amplifying potential AML risk. 

As the landscape changes, it is critical that our AML framework remains up-to-date and effective in keeping illicit funds out of our financial institutions.

That is why we have created an AML task force among the federal policymakers, the federal functional regulators and the enforcement agencies – so that we can take a step-back look at what we’re doing, how we’re doing it, and what we are asking of you, to combat money laundering and other forms of financial crime.

It is my hope that we will succeed in developing recommendations to address any gaps, redundancies or inefficiencies in our framework.  And as we go about our work, we will, of course, seek your views to inform our thinking.

Conclusion

In closing, I want to thank you again for all that you do to help make our financial system safe, secure and a crucial engine for economic growth here in United States and around the world.  The depth, breadth and sophistication of the U.S. financial sector remains the envy of the world.  Those of you in this room, who work day-by-day to protect your institutions, and your clients’ institutions, from the risk of illicit finance, deserve a great deal of thanks for that. 

I look forward to many more years of close and mutually beneficial collaboration on our shared mission of combating illicit finance and promoting financial integrity.

Thank you.

 

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